ELECTRICITY MARKET DESIGN William W. Hogan Mossavar-Rahmani Center - - PowerPoint PPT Presentation

ELECTRICITY MARKET DESIGN

William W. Hogan Mossavar-Rahmani Center for Business and Government John F. Kennedy School of Government Harvard University Cambridge, Massachusetts 02138 Successes, Failures and Where We Go Next 150th New England Electricity Restructuring Roundtable May 18, 2016

1

This Puzzle Has No Solution Policy Challenge: Create Options and Make Choices

O p e n A c c e s s C h

• i

c e E W G s T r a n s m i s s i

• n

D S M E n v i r

• n

m e n t J u r i s d i c t i

• n

W h e e l i n g t

• O

b l i g a t i

• n

S u p p l y S u n k C

• s

t R e c

• v

e r y L

• w

e r P r i c e s I m m e d i a t e

ELECTRICITY MARKET Electricity Restructuring

The early discussion of the immediate problems in the electricity industry was disjointed and focused in the perceived pieces of the solution rather than the larger puzzle. The traditional model and even the meaning of the word would have to change.

2

Wheeling

Open Access DSM Environment Transmission Jurisdiction Efficient Direct Access EWGs Spot Prices Pool Dispatch Bilateral Contracts RTGs Customer Choice Sunk Cost Recovery Supply Reliable Service Product Innovation New Incentive Regulation Cost Control Plants Obligation to Deliver

With the Right Choices, the Pieces Can Fit Together

t

• O

b l i g a t i

• n

S u p p l y L

• w

e r P r i c e s I m m e d i a t e

Regulation Competition Electricity Market

Competition

ELECTRICITY MARKET Electricity Restructuring

Developing a consistent policy for electricity restructuring depended on having a coherent market design. This puzzle has a solution, but some old ideas must be discarded and new components put in place.

3

Paths to Successful Market Design

Coordinated Spot Market Bid-Based, Security-Constrained, Economic Dispatch with Nodal Prices Bilateral Schedules Financial Transmission Rights License Plate Access Charges Market-Driven Investment at Difference in Nodal Prices (TCCs, FTRs, FCRs, CRRs, ...)

888 TLR Contract Path ISO PX Flowgate Zonal Rules Explode

SMD "Simple, Quick" "Last Resort"

ATC Transmission Rights Balancing Organized Market

890 Reform

Standardization Transparency 1997 1998 CAISO 1999 2003

ELECTRICITY MARKET Path Dependence

The path to successful market design can be circuitous and costly. The FERC “reforms” in Order 890 illustrate “path dependence,” where the path chosen constrains the choices ahead. Early attempts with contract path, flowgate and zonal models led to design failures in PJM (`97), New England (`98), California (`99), and Texas (`03). Regional aggregation creates conflicts with system

• perations. Successful market design integrates the market with system operations. (Hogan,

2002)

4

ELECTRICITY MARKET Energy Market Design

The U.S. experience illustrates successful market design and remaining challenges for both theory and implementation.  Design Principle: Integrate Market Design and System Operations Provide good short-run operating incentives. Support forward markets and long-run investments.  Design Framework: Bid-Based, Security Constrained Economic Dispatch Locational Marginal Prices (LMP) with granularity to match system operations. Financial Transmission Rights (FTRs).  Design Implementation: Pricing Evolution Better scarcity pricing to support resource adequacy. Unit commitment and lumpy decisions with coordination, bid guarantees and uplift payments.  Design Challenge: Infrastructure Investment Hybrid models to accommodate both market-based and regulated transmission investments. Beneficiary-pays principle to support integration with rest of the market design.

... Genco Genco Genco ... Genco Genco Genco ... ... Poolco Gridco Gridco

Competitive Wholesale Electricity Market Structure

Generation Transmission Distribution Regulated Regulated

... Disco Disco Disco ... Disco Disco Disco ... Cust. Cust. Cust. Cust. Cust. Cust. ... ... System Operator Regional Transmission Organization

5

Coordinated Spot Market Bid-Based, Security-Constrained, Economic Dispatch with Nodal Prices

The RTO NOPR Order SMD NOPR "Successful Market Design" Contains a Consistent Framework

07/05 Bilateral Schedules Financial Transmission Rights License Plate Access Charges Market-Driven Investment at Difference in Nodal Prices (TCCs, FTRs, FCRs, CRRs, ...) 5/99 12/99 07/02

POOLCO POOLCO

ELECTRICITY MARKET A Consistent Framework

The example of successful central coordination, CRT, Regional Transmission Organization (RTO) Millennium Order (Order 2000) Standard Market Design (SMD) Notice of Proposed Rulemaking (NOPR), “Successful Market Design” provides a workable market framework that is working in places like New York, PJM in the Mid-Atlantic Region, New England, the Midwest, California, SPP, and Texas. This efficient market design is under (constant) attack. Poolco…OPCO…ISO…IMO…Transco…RTO… ITP…WMP…: "A rose by any other name …" “Locational marginal pricing (LMP) is the electricity spot pricing model that serves as the benchmark for market design – the textbook ideal that should be the target for policy makers. A trading arrangement based

• n LMP takes all relevant generation and

transmission costs appropriately into account and hence supports optimal investments.” (International Energy Agency, 2007) This is the only model that can meet the tests of open access and non-discrimination. Anything that upsets this design will unravel the wholesale electricity market. The basic economic dispatch model accommodates the green energy agenda, as in the expanding California-Pacificorp Energy Imbalance Market (EIM).

6

ELECTRICITY MARKET The Last Should Be First

All energy delivery takes place in the real-time market. Market participants will anticipate and make forward decisions based on expectations about real-time prices.  Real-Time Prices: In a market where participants have discretion, the most important prices are those in real-time. “Despite the fact that quantities traded in the balancing markets are generally small, the prevailing balancing prices, or real-time prices, may have a strong impact on prices in the wholesale electricity markets. … No generator would want to sell on the wholesale market at a price lower than the expected real-time price, and no consumer would want to buy on the wholesale market at a price higher than the expected real-time price. As a consequence, any distortions in the real-time prices may filter through to the wholesale electricity prices.” (Cervigni & Perekhodtsev, 2013)  Day-Ahead Prices: Commitment decisions made day-ahead will be affected by the design of day- ahead pricing rules, but the energy component of day-ahead prices will be dominated by expectations about real-time prices.  Forward Prices: Forward prices will look ahead to the real-time and day-ahead markets. Although forward prices are developed in advance, the last prices in real-time will drive the system.  Getting the Prices Right: The last should be first. The most important focus should be on the models for real-time prices. Only after everything that can be done has been done, would it make sense to focus on out-of-market payments and forward market rules.

7

ELECTRICITY MARKET ERCOT Scarcity Pricing

ERCOT launched implementation of the ORDC in in 2014. The summer peak is the most important

• period. The first year results showed high availability of reserves and low reserve prices. The

experience in 2015 illustrates the fundamental properties of the ORDC, and higher reserve prices.

Source: Resmi Surendran, Analysis of Reserves and Prices, July 2, 2015-August 23: Hour Ending 17:00, ERCOT TAC Presentation, August 27, 2015.

8

William W. Hogan is the Raymond Plank Professor of Global Energy Policy, John F. Kennedy School of Government, Harvard University. This paper draws on research for the Harvard Electricity Policy Group and for the Harvard-Japan Project on Energy and the Environment. The author is or has been a consultant on electric market reform and transmission issues for Allegheny Electric Global Market, American Electric Power, American National Power, Aquila, Atlantic Wind Connection, Australian Gas Light Company, Avista Corporation, Avista Utilities, Avista Energy, Barclays Bank PLC, Brazil Power Exchange Administrator (ASMAE), British National Grid Company, California Independent Energy Producers Association, California Independent System Operator, California Suppliers Group, Calpine Corporation, CAM Energy, Canadian Imperial Bank of Commerce, Centerpoint Energy, Central Maine Power Company, Chubu Electric Power Company, Citigroup, City Power Marketing LLC, Cobalt Capital Management LLC, Comision Reguladora De Energia (CRE, Mexico), Commonwealth Edison Company, COMPETE Coalition, Conectiv, Constellation Energy, Constellation Energy Commodities Group, Constellation Power Source, Coral Power, Credit First Suisse Boston, DC Energy, Detroit Edison Company, Deutsche Bank, Deutsche Bank Energy Trading LLC, Duquesne Light Company, Dyon LLC, Dynegy, Edison Electric Institute, Edison Mission Energy, Electricity Corporation of New Zealand, Electric Power Supply Association, El Paso Electric, Energy Endeavors LP, Exelon, Financial Marketers Coalition, FirstEnergy Corporation, FTI Consulting, GenOn Energy, GPU Inc. (and the Supporting Companies of PJM), GPU PowerNet Pty Ltd., GDF SUEZ Energy Resources NA, Great Bay Energy LLC, GWF Energy, Independent Energy Producers Assn, ISO New England, Koch Energy Trading, Inc., JP Morgan, LECG LLC, Luz del Sur, Maine Public Advocate, Maine Public Utilities Commission, Merrill Lynch, Midwest ISO, Mirant Corporation, MIT Grid Study, Monterey Enterprises LLC, MPS Merchant Services, Inc. (f/k/a Aquila Power Corporation), JP Morgan Ventures Energy Corp., Morgan Stanley Capital Group, National Independent Energy Producers, New England Power Company, New York Independent System Operator, New York Power Pool, New York Utilities Collaborative, Niagara Mohawk Corporation, NRG Energy, Inc., Ontario Attorney General, Ontario IMO, Ontario Ministries of Energy and Infrastructure, Pepco, Pinpoint Power, PJM Office of Interconnection, PJM Power Provider (P3) Group, Powerex Corp., Powhatan Energy Fund LLC, PPL Corporation, PPL Montana LLC, PPL EnergyPlus LLC, Public Service Company of Colorado, Public Service Electric & Gas Company, Public Service New Mexico, PSEG Companies, Red Wolf Energy Trading, Reliant Energy, Rhode Island Public Utilities Commission, Round Rock Energy LP, San Diego Gas & Electric Company, Secretaría de Energía (SENER, Mexico), Sempra Energy, SESCO LLC, Shell Energy North America (U.S.) L.P., SPP, Texas Genco, Texas Utilities Co, Tokyo Electric Power Company, Toronto Dominion Bank, Transalta, TransAlta Energy Marketing (California), TransAlta Energy Marketing (U.S.) Inc., Transcanada, TransCanada Energy LTD., TransÉnergie, Transpower of New Zealand, Tucson Electric Power, Twin Cities Power LLC, Vitol Inc., Westbrook Power, Western Power Trading Forum, Williams Energy Group, Wisconsin Electric Power Company, and XO Energy. The views presented here are not necessarily attributable to any of those mentioned, and any remaining errors are solely the responsibility of the author. (Related papers can be found on the web at www.whogan.com ).